Younger investors are getting involved in higher risk investments despite evidence that these high risk products may be suitable for their needs, according to research published today by the Financial Conduct Authority (FCA).

The regulator said the growth in younger people investing in high-risk products may be driven by accessibility offered by new investment apps.

The FCA has published research findings into better understanding investors who engage in high-risk investments such as cryptocurrencies and foreign exchange.

Nearly two thirds (59%) of young investors surveyed said a significant investment loss would have a fundamental impact on their current or future lifestyle.

The thrill of investing and the social status that comes from a sense of ownership were key reasons behind the decisions to invest, particularly for those investing in high-risk products. The challenge, competition and novelty were seen as more important than conventional reasons for investing such as saving for retirement.

Investors often had high confidence and claimed knowledge, but the research showed a lack of awareness of the risks of investing. Over four in ten did not view losing some money as one of the risks of investing.

Younger investors also had a strong reliance on gut instinct and rules of thumb with over three quarters (78%) saying they trust their instincts to tell them when it is time to buy and sell. The same number also said there were certain investment types they consider a safe bet.

These younger investors were also more reliant on contemporary and social media for investment tips and news.

Heather Owen, Financial Planner at Quilter Private Client Advisers, shared concerns about the reliance on social media. She said: “Social media has been behind the rapid rise in young investors in recent years. On Instagram, there are 8.9m posts featuring #investing and 8.7m featuring #finance. On TikTok, the numbers are even more stark. Videos featuring #investing have generated over 1.6 billion views, videos featuring #finance have generated 1.5bn views. Temptation is all around, and the fear of missing out has resulted in many young investors jumping in, some right at the top of the market.

“And we are also experiencing the ‘gamification’ of investments, with the lines between gambling and investing becoming increasingly blurred, as shown by the collapse of Football Index a few weeks ago, and young people being drawn in by the ‘thrill’ of investing. With young people having more time on their hands, the temptation to ‘play the markets’ has been too great, but many will find out to their cost that there is no such thing as free money.

“This is the exact opposition of what investments should be. Real investing isn’t an overnight ‘get rich quick’ scheme. It takes time and ongoing attention, but the rewards can be much greater and can set people up for life. But for young people to truly understand the risks of investors, and to help them make investments work in their favour, we need mandatory financial education in schools so that young people truly understand the risks and rewards of investments.”

The FCA highlighted that these new investors may also have the lowest levels of financial resilience making them more vulnerable to investment loss. Research showed that a significant loss could have a fundamental lifestyle impact on 59% of self-directed investors with less than 3 years' experience, who are more likely to own high risk investment products, compared with 38% of investors with greater than 3 years’ experience.

Sheldon Mills, executive director, consumer and competition, at the FCA said: “Much of the consumer investments market meets consumers’ needs. But we are worried that some investors are being tempted - often through online adverts or high-pressure sales tactics - into buying higher-risk products that are very unlikely to be suitable for them.

“This research has helped us better understand what drives and motivates consumers so we can tell them about the risks involved in these investments through our investment harm campaign.”

The research was conducted with BritainThinks, an international insight and strategy consultancy. The research surveyed 517 self-directed investors and was conducted 18 August 2020 to 20 January 2021.